Country Summary

The Kingdom of Swaziland has a small financial market that is tied to that of South Africa. This link mirrors the trading activities between the two countries: 90% of Swaziland’s exports and 70% of the imports are traded with South Africa. Being a small country, Swaziland derives most of its revenues from trade.

The financial sector is an integral part of the development strategy of the country. The vision of Swaziland is to belong to the “10% of the medium human development group of countries” by 2022. Among the objectives for the financial sector, the authorities aims at restoring the solvency of banks, rendering the Stock Exchange more independent from the government and exploring the potential of the country to become an off-shore financial center. However, the country currently faces serious socio-economic challenges (HIV-AIDS, poverty and unemployment) along with the general decline of the economy, due to the recession in the region, resulting from the global financial crisis. Estimate of the economic growth for 2014 was at 2.5%, of which about one third was from the manufacturing sector

Swazi banks are well capitalized, liquid and sound. In 2013, the total capital ratio was at 24.4%, well above the statutory requirement of 8% and the Tier 1 capital ratio declined from 77.5% to 21.5% (the statutory minimum requirement is 4 %). The liquidity ratio on the other hand stood at 28.1%, well above the minimum required ratio of 20% for commercial banks. Between 2012 and 2013, assets of the banking sector increased by 16.6%, to E12.9 billion . The sector is highly concentrated; three out of the 4 existing commercial banks held 85.5% of the total assets of the sector ; these are Standard Bank Swaziland, Nedbank Swaziland and First National Bank of Swaziland which are owned by South African institutions.

Non-bank financial institutions (NBFIs) have been a growing segment of the financial industry in the recent years; NBFIs regroup pension funds, insurance companies, savings and credit cooperative, the Securities Exchange and other smaller intermediaries. Since the growth of the sector posed threats to financial stability, in 2010 the authorities created the Financial Services Regulatory Authority (FSRA). In the course of the FSRA creation, the capital market regulations were promulgated as law. The FSRA was established to reinforce the regulatory framework of this market segment.

The capital markets are still nascent. Both shares and bonds trade and list on the Swaziland Stock Exchange (SSX), which remains under-developed and inactive. In 2013, the market capitalization of the exchange was valued at E2 billion. The debt market is not very developed; there were 6 government bonds and 6 corporate bonds (2 companies) outstanding . Up until 1993-94, the country was a positive net creditor and had no need to borrow from the domestic market. It is only in 2010, that the CBS began issuing Treasury Notes; it interrupted its issuances in 2011 to resume them again in August 2013.

Monetary policy & Public debt

The main objective of the monetary policy of the Central Bank of Swaziland (CBS) is to promote price stability and foster a financial environment conducive to economic growth

The Lilangeni, the Swaziland currency, is pegged at parity with the South African rand; the rand is accepted as a legal tender in the country. The existence of this relationship prevents the Central Bank from being able to conduct an independent monetary policy: CBS monetary policies are influenced to a large extent by the South African Reserve Bank (SARB) policies. The Bank uses indirect market based instruments (such as liquidity and reserve requirements) mainly for prudential reasons. The Bank does not use direct instruments or other mechanisms such as open-market operations, money supply, rediscount window (discount rate)

In July 2015, the MPC decided to raise the key rate by an additional 25bp, after having raised it by 25bp in May 2015; therefore the key rate stands now at 5.75% and the spread between the key rates of South Africa and Swaziland narrowed from 50bp to 25bp. Following the decision of the CBS, commercial banks increased their lending rates by 25bp to 9,25% as of May 2015.

The Kingdom has not yet developed a domestic debt strategy. Domestic borrowing is subject to the ceiling defined in the Treasury Bills and Government Stocks Act of 1994 (as amended in 2003). A Public Finance Management law and an action plan are also going to be formulated; the Public Finance Management Bill (PFM) provides a medium-term debt strategy with annual updates and reporting requirements to Parliament. Currently, the government of Swaziland can borrow up to 25 % of GDP.

Estimates of the budget deficit for 2013-14 was at 3% of GDP or E 1.05 billion; E800 million was to be financed through domestic issuances; the underlying objective is to lengthen the yield curve since 63% of outstanding government securities would be held in the form of T-bills . In May 2015, public debt amounted to E6.70 billion, or 16.8% of GDP.

Inflation rate increased slightly to 4.9% in April 2015 from 4.7% in March 2015.

Market Structure

Market participants

Issuers

Investor base

In May 2015, commercial banks were the predominant investors, with 54% of the holdings of all government securities, followed by non-bank financial institutions with 32% and other investors.

Other intermediaries

Three Primary Dealers (PDs) and the stockbrokers are the other intermediaries in the Swazi debt market.

Instruments issued

Treasury bills

Treasury bills have maturities that range between 91-, 182-, 273- and 364-days.

Total stock of Treasury Bills amounted to E1.817 billion for the quarter ending June 2015, or 57.42% of the stock of total debt. The average yields on T-bills was 6.62%.

Treasury bonds

Bonds maturities range between 2-, 3-, 5- and 7-years. For the quarter ending June 2015, there were 9 government bonds listed on the Swaziland Stock Exchange, which were the SG009, SG011, SG013, SG016, SG017, SG018, SG019, SG020 and SG021.

The value of outstanding bonds was E 1.347 billion in the quarter ending June 2015. Holdings of government bonds were dominated by non-bank financial institutions, which held 37% of the securities, followed by commercial banks with 37% and other investors with 24 %.

Yield to maturity and average time to maturity

The T-bill rate was 6.24% in April 2015.

Primary and Secondary markets

Primary Market

Treasury bills are all issued as book entry securities.

Multiple bids are allowed including both competitive bids and non-competitive bids. However, non-competitive bids are capped at a maximum of E 5 million or 10% of the overall offer, whichever is the greatest.

For non-competitive bids, the minimum bid amount is E 10,000 and subsequent amounts are in multiples of E 10,000.

Secondary Market

OTC vs. Exchange traded

The secondary market is very illiquid; most investors have a buy and hold strategy. Treasury securities issued are listed on the SSX (SSX).

Clearing, Settlement and custody

The Central Bank of Swaziland (CBS) is the custodian of statutory reserve accounts for each participating bank in the clearing system. The CBS oversees the National Payment System by ensuring safe and efficient payment system in the country.

Guide to Buying Bonds

Procedures for market participation

The primary market is open to institutional investors and individuals alike. Banks, non-bank financial institutions, stockbrokers, corporate, individuals and non-residents can all participate in the auctions. Investors must contact one of the Primary Dealers or go directly to the Central Bank to purchase Treasury bills (the process to purchase the securities at the Central Bank is more administratively cumbersome).

Foreign participation is limited, hence there were few funds repatriation after the global financial crisis.

Taxation

There is no capital gains tax. Interest income is subject to a withholding tax of 10% for residents but the tax rate is 0% for non-residents.

Swaziland has double taxation agreements with the following countries: the UK, the US, Germany, Mauritius and Kuwait.

International investors may participate in the purchase of Treasury securities through Primary Dealers

Capital controls

There are no restrictions placed on the transfer of interest, profits, dividends and or other accrued income.

Restrictions on foreign exchange and profit repatriation

The Central Bank of Swaziland (CBS) is charged with monitoring the flow of foreign investment in and out of the country. It may screen and regulate foreign exchange and investments in the country.

The process of obtaining foreign exchange in Swaziland is fairly simple and straightforward. To obtain hard currency, one must apply through an authorized dealer. Rules also state that a resident holding foreign currency must sell it to an authorized agent or dealer for local currency within 3 months (90 days).